The Metropolitan Line Extension: Deadline Day

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On 26 March 2015, outgoing London Mayor and current Foreign Secretary Boris Johnson issued Mayoral Decision MD1478. Based on a cost estimate only 50% likely to be correct, London agreed to fund a transport project, with no cost ceiling, that primarily benefitted a Conservative marginal seat outside of the capital. Four days later, Parliament dissolved for the 2015 General Election.

The project is the Metropolitan Line Extension to Watford Junction, the fate of which now hangs in the balance. And for almost a year, the Government and the current Mayor of London have been locked in a quiet stalemate over the consequences of his predecessor’s promise.

Today, thanks to a rules and laws that can trace its origins right back to the dawn of the railway age, a final decision will need to be made. If not, then the extraordinary ten-year saga of the Metropolitan Line Extension will likely draw to an end – and it will remain unbuilt.

To Watford!

In 2008, Hertfordshire County Council officially approached Transport for London (TfL) with an innovative idea. They wished to connect Watford town centre to the end of the Metropolitan line.

To do this, they suggested using the alignment of the old Croxley Green Branch line. The current Watford Metropolitan line station would close and Metropolitan line trains would instead be sent on a rebuilt line along this route, stopping at two new stations before terminating at Watford Junction.

The possibility of using the alignment for this purpose had been mooted before. The problem was that it was a project that London Underground (or TfL, their parent) were never likely to fund themselves, for the simple reason that the primary beneficiaries wouldn’t be Londoners – they’d be the citizens of Watford, just over the border in Hertfordshire.

If the idea itself wasn’t innovative, Herts solution to finally getting it built was. They asked TfL for permission to design, finance and build it themselves. In return, TfL would ensure that sufficient trains were ordered as part of the upcoming S-Stock rollout to cover services on the line. They also asked that TfL remit back to the Council the fares collected from that stretch of the line until any debt Herts had taken on to fund it had been repaid.

Herts hoped this debt would be minimal. The plan was to ruthlessly police project costs and build only the absolute minimum amount of infrastructure required. They also hoped to secure the majority of the funding from local developers and other sources, such as local transport funding pots controlled by the Department for Transport (the DfT).

TfL provisionally agreed to Herts’ proposal and the Council commissioned a cost estimate for the work. At £170m, it was higher than they hoped. More critically, at that price point the costs outweighed the forecast benefits to a level that tripped the DfT’s rules on investment – unless they could be lowered, there would be no chance of securing the bulk of the money from the DfT.

Herts continued to work on the project, however, and in 2011 returned to the table with a more tightly scoped project. This time, the projected price was £115m. This was low enough to creep it under the DfT’s limits, who committed £76m to the project. Herts were able to source £7m of developer investment to add to this pot, and undertook to cover the remainder of the costs themselves using the debt model they had proposed to TfL.

In 2013 a Transport and Works Act Order (TWAO) for the project was issued by Parliament. Contracts could now be issued and work could begin.

Mark that date.

Work begins

It wasn’t long before issues began to emerge. Once the TWAO had been issued, Network Rail – Britain’s railway infrastructure manager – carried out a full assessment of the project at Herts’ request. in 2014 they delivered this to the Council, along with their estimated cost for the works. They priced it at £230m, more than double the amount the Council had estimated. To make matters worse, the Council were already struggling to manage their contractors, so that bill was continuing to climb.

At the end of the year, Herts returned to the DfT to request more funding. Initially, it seemed that they would receive little help. The Benefit to Cost Ratio (BCR) on the project had been border-line for the DfT at the original cost. Now, it was even lower. At a time when ‘austerity’ had become the buzzword of the era and the Department’s budget was being squeezed by the Treasury, there simply wasn’t any spare money to give.

As the year progressed, however, the position of the DfT – and beyond them, the Treasury – appeared to mellow.

The TfL question

At various points in 2014, as the scale of the project’s woes became clearer, the possibility of transferring it to TfL (or more specifically, London Underground) had been raised. With a reasonable track record of delivery, the argument went, and the in-house skill to tender and carry out the work, TfL were the best option for keeping project costs down and actually getting it built.

To say that TfL lacked enthusiasm for this idea would be something of an understatement. As David Hughes, then London Underground’s Director of Major Programme Sponsorship, commented at the beginning of 2015 (when rumours of a transfer began to circulate):

Late last year, faced with significant project slippage and cost escalation, the government asked us to consider stepping in and taking over responsibility for delivery of the scheme. We were clear that a suitable funding package needed to be in place before we would be prepared to take this on.

It wasn’t that TfL didn’t think they could deliver the project. It was simply that (having experienced a few painful ones of their own) they could smell a badly costed project from a mile away. Indeed, internally they believed that even Network Rail’s forecast cost was likely too low. Partly because this had been their experience with recent Network Rail costings elsewhere, but also because – as the project had dragged on through 2014 – the situation on the ground had clearly continued to worsen, and there were thus likely more nasty surprises lurking out of sight of the sponsor. Nonetheless, in late 2014, the DfT identified TfL as their preferred delivery agent and TfL were instructed by the Mayor of London to provide an estimated cost for the project.

In January 2015 TfL commissioned AECOM to produce an external cost estimate for the project. The resulting report placed a price tag of £284.4m on the extension. The bill had gone up again. Worse, the AECOM report indicated that due to the tight turnaround time required, the lack of access to key project information and the known history of cost increases, the resulting figure could – and should – only be treated as a P50 estimate, according to Treasury guidelines (a fact confirmed, in passing, in this DfT letter from April 2015).

One of our favourite hobbies at LR Towers is looking through civil service glossaries and project specification documents (it’s probably why we don’t get invited to many parties). ’P’ numbers come up in them a lot. They are a handy shorthand. They tell the reader exactly how confident the agency that produced an estimate is that it is accurate. They are best thought of as the answer to the question “How likely is it that the final cost of this project will exceed this estimate?”

In the case of the Metropolitan Line Extension, AECOM and TfL were saying that, in their opinion, the likelihood of it costing even more than £284.4m was about 50%.

The transfer

On 26 March 2015, Mayor Boris Johnson issued Mayoral Decision MD1478. It ordered TfL to do three things.

Firstly, it ordered TfL to take over responsibility for delivering the entire project.

Secondly, it ordered TfL, for the first time, to commit their own money to the project, to the total of £46.5m. £16m was to be drawn from the TfL Growth Fund (TfL’s ‘special projects’ budget line, which we’ve covered before) and the balance to come in the form of loans. The Decision indicated that the Treasury had agreed to increase TfL’s overall borrowing requirement accordingly.

Thirdly, it directed TfL to be responsible for any cost overruns above the £284.5m budget this effectively established for the project. This seems like a reckless statement to make, given that the agency had indicated that the likelihood of it costing more than this figure was equivalent to a coin-flip.

Four days later, Parliament was dissolved for the 2015 General Election.

The Mayoral Decision letter

The politics

At LR Towers, we are normally reluctant to attribute to politics that which can adequately be explained by inertia. This is because once started, troubled transport projects have a tendency to lurch on, even as costs escalate and delays occur. This is often because they require a significant amount of time, money and legislation to initiate and these sunk costs can rarely be retrieved.

In the case of the Metropolitan Line Extension, however, it is difficult to see how anything other than politics could have been the primary driver for this particular Mayoral Decision. TfL’s reluctance to take on the project is a matter of record. So too – thanks to the P50 status of their estimate – is the fact that they believed there was a significant risk that costs would increase further.

Indeed, had the situation been reversed and TfL approached the DfT or Treasury and requested money for a project based on a P50 estimate, it is unlikely they would have received a positive response. Treasury rules demand that the budget for any project forming part of an agreement must have all of its significant elements reliably priced and risk assessed. To say that a P50 meets these rules is something of a stretch.

Then there is the extraordinary decision to make TfL liable for any cost overrun. Interpreted in its broadest sense, with a flick of the pen the Mayor had removed from the Treasury, DfT and Herts Council any and all liability for the project. It was a very bad deal for London and TfL and for nobody else – understandable if TfL were under pressure from their constituents to build the extension, or if it was a critical blocker on work elsewhere, but neither of those situations were true. Nearly all of the negatives of project cancellation accrued to Hertfordshire – more specifically, to the citizens of Watford. The pressure was on the other side of the negotiating table.

With an agreement reached, however, then-Chancellor George Osborne was able to deliver some good news to Watford residents in his final March budget before the election. The Watford Observer reported his comments:

The Croxley Rail Link will open up new economic opportunities that will have real benefits for people living in and around Watford. Investment like this in Watford is possible because of the Conservatives’ Long Term Economic plan.

Richard Harrington’s hard work as a Conservative MP ensured I was aware of this project and its importance to the area.

12 days after this statement and four days after Johnson issued the Mayoral Decision, Parliament was dissolved for the first election under the Fixed-term Parliament Act. Watford was (using the BBC’s definition) a marginal seat in the predicted hung Parliament.

The overruns begin…

At the TfL Board Meeting in July 2015, the TfL Board expressed their concerns again about the impending transfer. They requested that it be noted that TfL had not been given the opportunity to fully understand either the project requirements or its costs. It was agreed that any further cost increases would be reported back to the DfT.

A London Underground delivery team was mobilised in September and the first of those cost increases wasn’t long in coming. The team discovered that £2.75m of Herts’ contribution to the project was actually in the form of land – something that hadn’t been clear in the original documentation from Herts or the DfT. Upon investigation, it became clear that this related to two small plots of land.

The first was earmarked for a future station car park. As part of the original revenue deal, it had already been agreed that Herts would retain the revenue from the resulting car park. Herts had assigned a notional value of £900k to this plot.

The second was a piece of railway land previously owned and managed by Network Rail. Herts were valuing this land at £1.8m in the transfer to TfL. In reality, it had been acquired by Herts from Network Rail for the notional value of £1.

As a report to the TfL Finance and Policy Committee wryly noted at the time: “neither is of any commercial value to TfL.”

TfL asked Herts Council for that part of the contribution as cash instead. Herts replied that they did not have the funds to do so.

On 4 November 2015, Mayor Johnson issued Mayoral Decision MD1570, which ordered TfL to commit a further £2.75m to the project.

…And continue

In November, the process of transferring the Metropolitan Line Extension was completed. This finally brought the two-stage main design and works package contract originally let by Herts County Council under the authority of London Underground. During this process, it was discovered that the sunk cost incurred by Herts so far was higher than either AECOM or TfL had believed.

By the time the had officially transferred to TfL on 20 November 2015, TfL finance documents show that the organisation had already revised its P50 estimate to £298.5m. It was agreed that work would continue to complete the design stage, but that the rest of the project would be subjected to a full cost review, pending further funding discussions with the DfT and Herts.

Work stops

In Autumn 2016, Taylor Woodrow – the original contractor put in place by Herts – completed Stage 1 design work, acting under the supervision of London Underground. The option to take the project forward with them into stage 2 was not taken by TfL. Internally, it had become clear that a funding gap now existed and no progress had been made with the other project sponsors as to how it should be closed.

More critically, London now had a new (Labour) Mayor – Sadiq Khan. With TfL’s own finances worsening and the Mayor under pressure to deliver his own manifesto commitments (which included a ‘fare freeze’ on TfL services), it remained unclear just how committed to the extension the Mayor was likely to be.

As we reported in December 2016, the first clear indication as to which way TfL and the Mayor planned to jump came with the release of his first Transport Strategy, which failed to mention the scheme by name.

Although public assurances were given by both TfL and the Mayor’s office that the project was on track, LR sources confirmed not just the existence of the funding gap, but also that it was significant. TfL’s private estimates for the project now ran closer to £350m – over three times Herts’ original proposed cost.

The existence of this gap (although not the figure) was officially confirmed by Andrew Jones, MP in his response to a Parliamentary question in December 2016:

Since taking over management of the Croxley Rail Link in November 2015, Transport for London (TfL) has been reviewing the main work contracts. From discussions between officials in the Department and in TfL, we are aware that, as a result of prices received from the supply chain, the costs of the scheme are currently higher than the agreed budget. We understand TfL is considering how best to deal with this.

Indirectly, Jones also confirmed the battle lines that had already been drawn between the DfT and TfL – The DfT were holding the line on their interpretation of Johnson’s promise. TfL (and the new Mayor) were refusing to pay:

Under the terms of the funding agreement in place for the scheme, TfL committed to the agreed budget of £284.4m and so agreed to meet any costs incurred over that budget. Conversely, they would retain the full amount of any cost savings. The Department will not be providing any additional funding for the scheme and expects TfL to complete it as agreed.

The impasse

This quiet cold war continued throughout early 2017. In June, a discreet update to the TfL website finally made TfL’s official position public:

Since taking over responsibility for designing and building the extension from Hertfordshire County Council in 2015, we’ve done detailed design work and reviewed the costs of the project.

This work now shows that the project cannot be completed with the current funding package of £284.4m agreed at the time. Our current estimate is that more than £50m will be needed on top of that.

We do not have the funding to cover these additional costs. The Mayor of London believes that the Department for Transport and the other funding partners need to agree how the additional costs will be met. This is now being discussed between the funding partners.

The timing wasn’t accidental. Behind the scenes, TfL had finally received their first full report into the likely final cost of the project, taking into account all of the costs sunk into the design stage completed the previous autumn and the work yet to come.

Their first, full, review, issued in June, now forecast a total project cost of £333m, with an additional £24m of cost pressures that would require factoring in. And this too was only a P50.

The impasse continued. Work on the extension didn’t.

‘Discussions continue’

On Friday 29 December 2017, LR and BBC Three Counties Radio (who are, understandably, somewhat curious too) made inquiries as to the current status of the funding negotiations.

The Mayor’s Office:

While work remains to identify the remaining funding needed for the Metropolitan Line Extension, the Mayor and his team have had a number of productive meetings with the council and local MPs, with a lot of agreement about how the project can proceed.

TfL remains committed to the £49m it has allocated to the project, and work will continue alongside local MPs, the Government and Hertfordshire County Council to find the additional sources of funding required.

The DfT:

The Metropolitan Line extension will deliver significant transport benefits and boost economic growth in Watford and wider north-west London. We are continuing to work closely with TfL and local funding partners on options for progressing the scheme.

TfL:

Discussions continue.

The office of Richard Harrington, MP for Watford:

He is in discussions with London Mayor Sadiq Khan and the Secretary of State, Chris Grayling MP, and will be able to confirm the details of the new funding agreement soon.

These statements are well crafted. So well crafted, in fact, that they highlight nicely that – although ‘discussions continue’ – the positions of all parties seem to remain the same. TfL will only pay the original contribution they committed. The DfT won’t pay a penny more.

There was a reason that we asked on the last working day in December 2017, however – that Transport and Works Act Order issued all the way back in August 2013.

The rules of building a railway

Although the current Transport and Works Act only dates back to 1992, it is, in many ways, simply the latest version of a set of rules that date right back to the dawn of the railway age. Back then, concerned with the number of schemes being floated in Britain, the Government laid down some basic rules:

  • If you want to build a new railway, you have to ask Parliament’s permission.
  • Once permission is given, you must show sufficient construction progress within five years, or that permission expires.

The terms are modernised, but those same principles still exist within the Transport and Works Act today and various elements of the associated rules and legislation – once a TWAO is issued for your railway (or your canal, if any billionaires reading this are feeling naval) then, to put it simply, you have five years to build enough of it to show that you’re serious. If you don’t, then you will need to return to Parliament and start all over again.

The deadline

On 28 September 2017 London Mayor Sadiq Khan issued Mayoral Decision MD2170, pertaining to the Metropolitan Line Extension. It is an interesting read (and we encourage you to read it), confirming a lot of the narrative we have outlined here. Its primary purpose, however, was to make one thing abundantly clear – the consequences of ‘discussions continue’:

4.3 If no additional funding can be identified in a timely manner, the Transport and Works Act Order (TWAO) powers and planning permission granted in respect of the MLX which are to be implemented by August 2018 may lapse.

The Decision also highlights that it is not just about the money now – but time. TfL need to let the contracts and the work has to be done. Helpfully, it provides a deadline for the minimum amount of work needed even just to ensure that discussions can, as they say, continue:

[F]or TfL to be assured that the programme included a prudent level of contingency to cater for the delay (bearing in mind this deadline is absolute), the additional funding would need to be secured by 31 December 2017.

If you are reading this article at time of publication, then that deadline is today.

The future?

As with all things political, one suspects that TfL’s ‘absolute’ deadline is not entirely absolute. Should a decision be made on the 2 January 2018, one assumes that the TWAO can still be satisfied. Indeed perhaps, behind-the-scenes, an agreement has already been made. As it stands, however, the future for the Metropolitan Line Extension – and the £71m of sunk costs already invested into the project – look very bleak indeed.

Regardless of whether it continues or not, one thing is now certainly true. The financing, management and politics of the project seem closer to that found in the era of the Railway Robber Barons than they do to a modern transport project.

In a way, it would perhaps be fitting then (although unfortunate for the good citizens of Watford) if it was the legislation created to curb such behaviour in the nineteenth century that condemned the Metropolitan Line Extension to failure in the twenty-first.

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Written by John Bull